Commentary: Webvan couldn't deliver

The high-profile dot-com grocer just couldn't deliver on its dreams. It grew too big, too fast and eventually choked on its own complexity.

January 2, 20024:43 PM PST

By Alex Drobik and Geri Spieler, Gartner Analyst

Webvan Group was a high-profile dot-com grocer that just couldn't deliver on its dreams. It grew too big, too fast and eventually choked on its own complexity.

It focused on the delivery side of the dot-com shopping explosion, but, like others, found sluggish consumer spending and the slowing economy impossible to get around.

George Shaheen was hired as chief executive officer in 1999 to rescue the company, but, in April 2001, after less than two years in the job, he left. His move to Webvan--after a successful 32-year run at Andersen Consulting--had been seen as a huge loss to Andersen and proof that the new economy was to be taken seriously. Even after leaving Webvan, controversy followed: Shaheen was to get $375,000 annually from Webvan for the rest of his life.

By Monday, when Webvan formally closed it doors and filed for bankruptcy, 2,000 workers were without jobs and the concept of delivering the online promise took another hard, but not fatal, blow.

Webvan failed on two fronts: It could not break the physical strength of traditional players in the grocery market, and it could not, as a niche operation, make a profit. With consumers still going to Wal-Mart and Stop and Shop for groceries, Webvan's customer base was reduced to early adopters of the service and people who could not readily go shopping, such as the elderly and disabled. Despite this, Webvan was organizing for distribution across the United States.

Gartner estimates the cost of delivery to each customer to be about $20 to $25, based on an average grocery order of $100 with a profit of about $1. Consequently, it didn't take long to burn through Webvan's $700 million war chest.

Webvan's only hope lay in the possibility that consumer demand might result in huge trading volumes and that it might persuade Amazon, eBay, Wal-Mart and other, big, successful sellers to use Webvan's trucks for next-day delivery. It failed on both counts.

Gartner has always believed that companies with the traditional brick-and-mortar storefronts as well as a strong Internet presence, the so-called bricks-and-clicks, will nearly always win the hearts of online consumers.

Ordering via the Internet becomes feasible in grocery retailing when the service is a sales channel of a mainstream company's operations and there can be strong leveraging of the company's established name and retail presence. Those companies have the advantage of economies of scale in both the goods to be purchased and in distribution. It doesn't hurt that customers are also used to shopping with them.

Webvan is a victim of overambition and a business model that could not work. Its fleet of delivery trucks resulted in high and fixed operating costs where only volume could have generated good economies of use. Webvan did not have the sales of the big players and thus couldn't use cash flow or revenue to improve its business. The result was inevitable.

The hard lesson for Webvan is that it did not enter into a partnership with a broader, more traditional company. That move would have been no guarantee of survival, but it would certainly have allowed for more flexibility and infrastructure than simply going it alone.

Webvan could also have broadened its business model to embrace the corporate community. For example, it could have offered to companies a service via their intranets so that groceries could be ordered and then picked up at the end of the day. Smaller U.S. cities--such as San Jose and Sacramento--are big enough markets and have large multistory office buildings and pain-in-the-neck grocery shopping. Webvan could have attracted several thousand more customers and it would not have had to deliver to several thousand different doors--each office building has the potential of being "home" for hundreds of customers.

Webvan went into business to deliver groceries, and it is delivery that killed it. Moreover, finding new customers was quite difficult and, in any event, it turned out to be too expensive to deliver to them.

The brick-and-mortar operations are having the last laugh.

(For related commentary on what it takes to have an effective e-commerce site, see TechRepublic.com--free registration required.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.